Effective March 11, 2024, the new independent contractor rule from the United States Department of Labor (DOL) takes effect. This rule change restores an earlier standard that required employers to weigh several factors in determining whether or not they may treat an individual as an employee versus an independent contractor.

The analysis of whether or not an individual may be treated as an independent contractor as opposed to an employee can have many legal implications, including but not limited to subjecting your company to a mischaracterization lawsuit under the Fair Labor Standards Act (“FLSA”).

The new test will consider the following factors in determining whether an individual may be treated as an independent contractor as opposed to an employee:

1. The degree to which the employer controls how the work is performed,
2. The worker’s opportunity to profit or lose money based upon the work performed,
3. The amount of skill and initiative required for the work,
4. The degree of performance of the working relationship,
5. The worker’s investment in equipment or materials required to perform the work,
6. The extent to which the service rendered is integral to the employer’s business.

The consideration of whether your company may treat an individual as an independent contractor versus an employer does not end with those six factors. That is because there are many state and local employment laws that may be violated if your company mischaracterizes an employee as an independent contractor. For example, New Jersey applies the “ABC Test” in determining if an individual may be characterized as an independent contractor versus an employee in determining if that individual should be covered by unemployment protections or must be covered by your company’s workers’ compensation policy.

It is also strongly recommended that companies have class-action waivers in all arbitration agreements they use with their independent contractors.